QC Holdings, Inc. v. Allconnect, Inc., C.A. No. 2017-0715-JTL (Del. Ch. Aug. 27, 2018) (Laster, V.C.)
In this memorandum opinion, the Court of Chancery granted a former stockholder’s motion for summary judgment and directed the target corporation in a merger to use certain escrow funds to fulfill its obligations under a put agreement.
This dispute arose over a put agreement, pursuant to which defendant Allconnect, Inc. (the “Company”) granted plaintiff QC Holdings, Inc. (“QC Holdings”) the right to cause the Company to repurchase shares of its common stock in return for $5 million in cash. The put agreement provided that the Company would not be obligated to pay the put price unless it had sufficient funds legally available and no senior indebtedness outstanding. QC Holdings exercised the put right in accordance with the procedures set forth in the put agreement. At the time the Company’s obligation to pay the put price matured, the Company had senior indebtedness outstanding and lacked sufficient funds legally available to make the payment. Several months later, the Company was acquired by a third party in a reverse triangular merger, with the Company surviving as a wholly owned subsidiary of the acquirer. Immediately prior to the effective time of the merger, the Company paid off all of its senior indebtedness. The Company did not use any of the merger proceeds to pay the put price, but, at the acquirer’s insistence, placed $5.1 million in escrow as a reserve against QC Holdings’ claim to the put price. QC Holdings filed suit to recover the put price and moved for summary judgment.
Although the Court of Chancery rejected QC Holdings’ argument that the merger consideration constituted funds legally available before the merger closed, the Court found that QC Holdings was entitled to receive the put price. The Court viewed the central issue to be the status of the put shares at the time of the merger. The Court seemed to indicate that if QC Holdings did not transfer the put shares to the Company prior to the merger, then QC Holdings’ right to receive the put price may have been effectively terminated, as the shares would have ceased to exist and been replaced only by a right to receive the merger consideration under Shields v. Shields. However, the Court found that QC Holdings had transferred the put shares to the Company when it exercised the put right in compliance with the put agreement. From that point on, the Court held, QC Holdings lost its status as a stockholder and held a contractual claim against the Company for payment in the amount of the put price. Finding that the Company, as the surviving corporation in the merger, remained bound by the put agreement post-merger, the Court held QC Holdings was entitled to a decree of specific performance compelling the Company to use the escrow funds to fulfill its obligations under the put agreement.